Metro Performance Glass Limited (MPG.NZ) Earnings Call Transcript & Summary

My name is Simon Mander, and I'm the CEO of Metro Performance Glass, and with me is our CFO, Brent Mealings. This morning, we will provide you with an overview of the group's results for the 6 months to the 30th of September 2022, and we'll then be happy to take any questions. Turning now to Slide 2. We've noted 4 key messages which summarize the year. I'd like to start by noting challenging market conditions faced in the first half, particularly in New Zealand. We've been focused on our customers, recovering of our gross margins and preparing the business for the expected increase in Low E glass production as a result of introduced building code changes. The series of price increases we have introduced are beginning to show in our margins from the second quarter, and we expect this to continue through the second half. Australian Glass Group delivered on its turnaround plan, achieving a significantly improved performance driven by solid demand and price increases. Our net debt has increased in the first half, primarily driven by an increase in working capital due to ongoing supply chain disruption, higher-value inventory and debtors. We also commenced a cost-out program, and I'll expand on this program of initiatives later in the session. Moving to our key financial results for the first half on Slide 3. Group EBITDA of $5.6 million was an increase of 78% on the prior comparable period, driven by a full trading period without a lockdown and significant price increases in both New Zealand and Australia. Net debt increased from the full year to $59.1 million, driven by working capital requirements. Our leverage ratio remains consistent with the full year result at 3.8x. During the period, Metroglass concluded an additional year extension on its current syndicated banking facilities out to the end of October 2024. On Slide 4, New Zealand revenue of $100 million was up 14% versus the previous comparable period with an EBIT of $3.6 million, down 15%. Q1 was a major contributor to the earnings impact in the first half, with the additional price increases introduced in June and September beginning to recover margins in the second quarter. All of our segments faced disruptions in supply chains, project delays and people availability challenges that impacted operational efficiency. In spite of this, all segments delivered improved results in the prior year, primarily driven by a full trading period and the price increases. Our focus on continually improving the customer experience continues to reflect the positive levels of customer satisfaction, achieving a 7.9 out of 10 in our latest survey in May 2022. Another key milestone is the installation of the new furnace at the Highbrook plant in Auckland, and this project has progressed very well and is undergoing its final commissioning phase now. On Slide 5, in light of the year-on-year decline in volumes and an expectation that further declines are likely later in the new calendar year, Metroglass is undertaking organizational review and implemented a series of initiatives across the group to ensure capacity and resources are appropriate to service demand as the cycle changes. Following recent investments in processing capability and furnace capacity at our Auckland and Christchurch plants, business is now in a position to rationalize its production footprint, and we will cease manufacturing operations in the Bay of Plenty by the end of December 2022. Metroglass will continue to have sales representation, commercial and residential glazing resources and a retrofit presence in the important Bay of Plenty market. The overall cost-out program, including the Bay of Plenty site rationalization, is expected to achieve annualized savings in the New Zealand business in the range of $8 million to $9 million, with benefits occurring from the second half of FY '23. Regrettably, these changes impact on a number of our people, and we are committed to supporting our impacted team through this period. On Slide 6, Australian Glass Group's revenue of $38.2 million was up 32% versus prior year with an EBIT of $2.6 million, up $3.3 million from the modest loss in the first half of FY '22. We're also pleased to see solid gross margins in that business. AGG delivered on its turnaround plan, achieving revenue and EBIT targets for first half '23, supported by stable operating performance and price increases. Also pleasing to see that New South Wales business has made a significant turnaround in the half. AGG now enters the next phase of its strategy, having achieved its turnaround and is well positioned for growth alongside the increasing adoption of double glazing and changes to the National Construction Code, NCC, coming into force in 2023 that will further accelerate its uptake. I'll now hand over to Brent to discuss the financial results in more detail.

Thanks, Simon, and good morning, everyone. On Slide 7, we break our revenue down. And in New Zealand, you can see an overall increase of 14% as all segments achieved year-on-year improvements. As Simon has already mentioned, we are also happy to see continued improvement in the AGG business. Slide 8 reflects our half year results. Segmental results are on the right-hand side of the page. New Zealand's gross profit margin for the half was impacted by the increase in input costs prior to the scheduled price increases progressively introduced in Q1. In line with expectations, we have begun to see margin improve from Q2. In Australia, gross profit margin almost doubled, in part reflecting the price increase in response to cost inflation pressures, but also in recognition of the increasing value of Glass throughout the industry. Turning to the group results on the left-hand side of it, our net profit after tax increased from $400,000 to $600,000. I'd like to move to the waterfall on Slide 9. Movements in New Zealand's EBIT results are shown in gray shading. Our New Zealand EBIT result was $0.5 million lower than the prior year, with higher revenue offset by increased input costs that we were unable to offset by market price increases at the same rate. Increases in distribution and glazing were partly offset by savings elsewhere. Turning to the Australian performance, which is in the green shaded area of the waterfall. The encouraging story here is revenue growth and gross profit -- gross margin profit improvements. It has largely offset the inflationary cost pressures. AGG has achieved a solid turnaround in profitability in the half. Turning to the balance sheet slide, Slide 10. Net operating cash flows were significantly below the comparative period primarily driven by requirements on working capital. Capital expenditure has reduced to $5 million in the first half with a focus on targeted investments and maintenance capital only. On our big points on the slide, we have noted comparisons between the first half of 2022 and the full year 2022. I'd like to focus on the comparisons to the full year ended 31st of March. Net debt has increased by $6.8 million since March, driven by the working capital requirements and inventory primarily with our leverage ratio consistent with March 22 at 3.8x net debt to EBITDA. Back to you, Simon.

Thanks. Now turning now to the outlook for FY '23 on Slide 11. The number of residential consents in New Zealand has been running at elevated levels and well above the industry capacity, supporting a stable pipeline of work in the near term. However, we expect that economic headwinds are likely to reduce the number of dwellings actually constructed later in calendar year 2023. Updates to the H1 building code, applicable consents from November '22 will support an increased demand for higher-performing Low E glass, and this will have positive impact on gross profit performance. The overall cost-out program, including the Bay of Plenty site rationalization is expected to achieve annualized savings in the New Zealand business in the range of $8 million to $9 million, with benefits accruing from the second half of FY '23. Any slowdown in Australian construction activity is likely to be offset by increases in the market penetration of double glazing and accelerated by the upcoming changes to the National Construction Code in 2023. We believe we are very well positioned to meet the requirements and opportunities for them to buck the upcoming changes in the New Zealand and Australian building insulation regulation code changes. Finally, on Slide 12. Metroglass' strategy and focus remain unchanged as we continue to build resilience and defend our leadership position in a competitive New Zealand market, grow profitability of our Australian business and benefit from increasing demand for double glazing to ensure our balance sheet is strong and sufficient to cope with future risks and opportunities. Now that brings us to the end of our presentation, and we're now happy to answer any questions that you may have. Thank you.

[Operator Instructions]

It's Grant Lowe from Jarden. Can you hear me okay?

Yes.

Great. Just so looking at the geographical results, firstly, just in terms of New Zealand, I see gross margins were down $41 million versus $44.4 million in the first half last year. Can you give us a sense as to the split quarter-on-quarter? You filled out that the second quarter was an improvement on the first. Just trying to understand that momentum coming out into the second half.

Yes. So as we sort of described, Grant, Q1 was difficult at a gross profit performance level given the timing of the price increases, which we [ started ] beginning of June and the beginning of March, and the one at the beginning of June was 11.75%. So it was quite a decent increase. So what we've seen is from Q2 onwards, quite a good improvement in our gross profit and we're [indiscernible] appearing into the second half.

Okay. Is it reasonable to assume that it might be at around the 44% in the second half? Or is that [indiscernible]?

What percentage did you say?

If it was 44.4% in the first half last year, is that a reasonable assumption going into the second half?

Yes, I don't think that'd be too far off we would be aiming for. Yes.

Yes. Excellent. And then in terms of Australia, just so I understand correctly. Positive result there, which is great. You've said that any slowdown in construction activity is likely to be increased, offset by increases in market penetration and price changes and the like. Are we to -- sort of looking into at any major changes, are we expecting that earnings might be able to remain at these levels going forward just by [scope]?

Yes.

Okay. Around the debt side of things. I guess I was surprised to see that to go up by quite so much. In terms of -- obviously, working capital driving that. In terms of where things sit at the moment, is working -- our working capital levels sort of a reasonable go-forward basis? Or are there -- do you expect to see some unwind either in terms of inventory or receivables in particular?

The major driver of the -- apart from the price increases, which obviously have an impact, but the supply chain disruption is still an issue we're having to deal with in terms of our safety levels. We're holding something like 40% more inventory at the end of September compared to March. So to the extent that the supply chain disruption starts to settle down in the new year, we see that as an opportunity to wind that back, but it's been in the recent weeks, there's been -- you probably have seen the press around the New Zealand ports in particular. And this is probably a Christmas thing as well. So we're hopeful that beyond into the new year, we can wind that out.

Yes. Okay. So in terms of that 40% lift September versus March, is that in dollar values rather than volume?

It's volume.

Volume. Okay. Right. Okay. So yes, okay. So that's one to watch over time. In terms of the -- its facilities, you've called out an extension to the -- your main facility by a year. Is that -- still remain at $75 million facility?

The total facility is $80 million.

Including the arbitrage?

Sorry, Grant. What's that?

I think it was at the -- it was $75 million plus $8 million or so of overdrafts. So it's similar?

Yes. It was -- the original facility was $75 million plus a standby of $10 million, $85 million. So we've effectively now got a $75 million plus a standby of $5 million.

Okay. Understood. And in terms of the organizational review, I appreciate there is still obviously work to do around that in some sensitivity. But just in terms of making sure I've understood that correctly. So the $8 million or $9 million of benefits growing, is that net of any assumed revenue loss? Or is that just purely cost savings?

Purely cost savings.

We've shown that purely it's cost savings.

Yes. Okay. And so in terms of -- presumably, you mentioned that you're still going to have through into the year in terms of the glazing and retrofit of Bay of Plenty. So obviously, we still have additional costs associated with -- charged down to the Bay of Plenty. Can you give us a sense of what that offset might be?

That's about [indiscernible] -- the $8 million to $9 million would be net effect.

Sorry, say it again?

It would be -- that would be the net benefit.

Yes. Okay. Are you able to get any sense of the sort of additional costs that are offset within that net number?

I think what we're saying is that if you -- we'll be distributing from Auckland to that customer base, the $8 million to $9 million is including offset. So that's the net.

Yes. And in terms of -- I see none actually account for -- none of the accounts for refers to cash plus savings of $34 million associated with the Bay of Plenty manufacturing facility -- is the $8 million to $9 million, that's after depreciation presumably?

No. that's -- there's other cost savings across New Zealand that make up the remainder of that. So about half of those cost savings are achieved in the Bay of Plenty, and the remainder is across the rest of the business.

Yes. And just in terms of the way that plays out, Grant, within that sort of $8 million to $9 million, around about $2 million will sit in admin, which is related to the other cost saving initiatives that we've got focused on. And then there's -- a fair chunk of it is obviously going in these other initiatives that we're doing. And majority of it sits in the gross profit line and the factory costs, the fixed cost base, right?

And last one, just around that. In terms of -- I mean, you're maintaining your -- how do you see the local competition on the risk of revenue loss? Or is that you believe you can continue to service that region without revenue loss?

Yes. Look, we're confident that we're able to maintain our revenue there, and we're working with our customers through that. So there's -- that risk is everywhere. It's a competitive industry. We maintain a very strong presence there. So the manufacturing of the product is not there. And we already supply -- because of the manufacturing limitations in that plant, we already supply a reasonable amount of the product we sell in that region from outside of the region. So we're quite -- and then we deliver down Rotorua or Taupo way and stuff like that out of our open plant as well as any plant. So yes, there's always some risk when you do something like this. But on balance, we're confident in what we're doing there. And there's some significant benefit likely. And we will still have a very strong presence and in the amount like we do in our other branch networks that we have around the country and the regional towns.

[Operator Instructions] And it appears there are no further questions at this time. So I'll turn it back to you for the conference for any additional or closing remarks.

Okay. Well, thanks, everyone. If you have any further questions you think of later, don't hesitate to contact us. Thank you.